I have a confession to make: I am a chronic over-projector. This fact has even been reported several times by The New York Times. In May 2008 I was quoted predicting that our revenue would be “an estimated $8.5 million this year.” We actually finished the year at $6.6 million. Even as recently as June 2010, I thought we’d hit sales of “$16 million in 2010.” We finished the year at $13.5 million.
A writer for The New York Times Magazine, Rob Walker, had this to say about TerraCycle in May 2007: “The privately held start-up can get a little carried away with its own hype at times. In 2005, the company projected sales of $3 million; it ended up selling a little less than $500,000. In 2006, the company said it expected annual sales of $2.5 million; the actual figure turned out to be a bit under $1.6 million.” The writer went on to quote our head of public relations, Albe Zakes, as calling me “very optimistic” — but he also reported that “even the actual figures represent a solid growth record.”
We have had strong growth, ranking as the 288th fastest growing private company in America in 2009, according to Inc. magazine, and the 768th in 2010. Our sales have grown from $77,000 in 2004 to $500,000 in 2005 to $1.6 million in 2006 to $3.3 million in 2007 to $6.6 million in 2008 to $7.3 million in 2009 and to $13.5 million in 2010.
So why do I keep over-projecting? I can assure you I’m not doing it maliciously or even consciously, but here are some of the concerns that drive my performance projections — and some of the things we’re doing to develop more realistic projections.
1. INVESTOR NEEDS Investors — especially venture-capital investors — demand aggressive “hockey stick” growth curves for revenue and profit. They want big multiples, and they want them in short time frames. They want to know what’s being targeted and what the chief executive believes is achievable. If they don’t see optimism, if they aren’t buying into a dream, they are reluctant to invest. The upshot is that, especially for a small-cap high-growth business, there is a lot of incentive to project optimistically. Of course, this rarely ends well. I can tell you firsthand that the flip side of this dance is the challenging conversations that inevitably follow — when you have to explain to your investors why you have failed to live up to your projections. Fortunately, most of the investors I’ve worked with have been understanding and patient and have continued to believe in the vision that brought them to the company in the first place.
2. TIMING We typically prepare our financials, or budgets, for the following year a few months before the current year ends. That means we are making our estimates based on contracts that may not yet be finalized and that will produce revenue up to 14 months out. This is extremely difficult for a fast growing business.
3. OPTIMISM As the chief executive, I want to push my team to set and drive toward “big hairy audacious goals.” Aiming high is a major motivator and can create growth — perhaps not as much as you projected but still substantial.
While all of these concerns are here to stay, I enacted a new budgeting system a little more than a year ago to help solve this problem. We created a “worst case budget” that forecasts only revenue and expenses that we are certain about. Every week, all of the managers at TerraCycle have to submit all budget changes — positive and negative — to our finance department. The finance department updates the budget and our senior team meets monthly to make strategic changes to accommodate the evolving “worst case” budget.
And, in conversations with the media, we’ve moved away from discussing what we think will happen, and we try to focus on what did happen. So my official projections for our performance in 2011?
We’ll do much better than we did in 2010.
Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.
Article source: http://feeds.nytimes.com/click.phdo?i=075028a508478a6357c7c6297fa9d8c2